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IAS 2 Inventory Key Notes

IAS 2 requires inventories to be measured at the lower of cost and net realizable value (NRV). Key formulas include calculating NRV, total cost of purchase, and methods for determining cost such as FIFO and weighted average cost, while LIFO is prohibited. Important points include consistency in cost formulas, the necessity of write-downs when NRV falls below cost, and periodic reviews of NRV at reporting dates.

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2 views2 pages

IAS 2 Inventory Key Notes

IAS 2 requires inventories to be measured at the lower of cost and net realizable value (NRV). Key formulas include calculating NRV, total cost of purchase, and methods for determining cost such as FIFO and weighted average cost, while LIFO is prohibited. Important points include consistency in cost formulas, the necessity of write-downs when NRV falls below cost, and periodic reviews of NRV at reporting dates.

Uploaded by

murad.m.f5
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We take content rights seriously. If you suspect this is your content, claim it here.
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IAS 2: Inventories

Summary of Key Measurement Rules & Formulas

1. The Fundamental Rule

Inventory must be measured at the Lower of Cost and Net Realisable Value
(NRV).

2. Important Formulas

A. Net Realisable Value (NRV)

NRV = Estimated Selling Price − Estimated Costs to Complete − Estimated Selling Costs

B. Cost of Purchase

Total Cost = Purchase Price + Import Duties + Transport/Handling + Other Directly


Attributable Costs − Trade Discounts/Rebates

C. Cost Formulas (Methods)

• FIFO (First-In, First-Out): Assumes items purchased first are sold first.
• Weighted Average Cost (AVCO): Calculated by dividing the total cost of goods
available for sale by the total units available.
• Note: LIFO (Last-In, First-Out) is strictly prohibited under IAS 2.

3. Components of Cost

Included in Cost Excluded (Recognized as Expense)

Direct Materials & Labor Abnormal Waste (Materials/Labor)

Storage Costs (unless necessary for


Variable Production Overheads
production)
Included in Cost Excluded (Recognized as Expense)

Fixed Production Overheads (Normal


Administrative Overheads
Capacity)

Costs to bring to present location Selling and Distribution Costs

4. Critical Points to Note

• Consistency: The same cost formula should be used for all inventories having a
similar nature and use to the entity.
• Write-downs: If NRV falls below Cost, the inventory must be written down to NRV.
This write-down is recognized as an expense in the period it occurs.
• Reversal of Write-down: If the value later increases, a write-down can be reversed,
but only up to the original cost.
• Periodic Review: NRV should be estimated at each reporting date.

International Accounting Standard 2 - Technical Summary

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